Analysis: State-run CNOOC's blacklisting ups geopolitical risks for China's oil and gas companies

Singapore — The blacklisting of state-run upstream company China National Offshore Oil Corp. by the US government on Dec. 3 has raised the stakes for China's oil and gas companies amid worsening trade and diplomatic relations between the two countries.

China National Offshore Oil Corp. or CNOOC is the country's largest LNG importer and the Chinese national oil company with the highest percentage of its portfolio located overseas, often in partnership with international oil companies.

The blacklist, aimed at Chinese companies with links to the country's military establishment, is also the first time one of China's big three national oil companies has been directly targeted, the other two being PetroChina and Sinopec.

So far, the national oil companies have either been on the receiving end of the US-China trade war that disrupted trade flows for oil and gas, or were overlooked in earlier versions of the blacklist that named smaller energy companies like Norinco or Sinochem.

CNOOC's blacklisting was promulgated by an Executive Order from the White House that primarily bars US entities and individuals from making investments in securities issued by the NOC effective Jan. 11, with a deadline of Nov. 21, 2021 to dispose the assets.

There is no immediate impact on trade flows or US LNG cargoes currently being imported by CNOOC, and companies have not been barred from trading with the NOC. But the risk of China's NOCs being ensnared in US sanctions should geopolitical relations deteriorate further can no longer be ruled out.

CNOOC Group's Hong-Kong listed subsidiary, CNOOC Ltd, in which it has a 64% stake, has seen its shares fall to as low as HK$7.40 on Dec. 4 from HK$9.60 on Nov. 26, after initial reports of the blacklisting in late November and the official announcement on Dec 3. Shares of China Oilfield Services Ltd or COSL, in which CNOOC Group has a 50.5% stake, also fell sharply.

"The impact on CNOOC's Corp.'s operations and the broader oil and gas market for China is currently limited. The executive order only prohibits any US persons from dealing in securities of these companies, so the impact may likely only be confined to the share price performance of CNOOC's subsidiaries – namely CNOOC Limited and COSL," said Grace Lee, senior oil analyst, S&P Global Platts Analytics.

However, she said the blacklisting could potentially limit CNOOC's access to financing from US companies. Earlier incidents of blacklisting have impacted both equities and bond markets.

LNG IMPORTS NOT IMPACTED

CNOOC has the largest number of LNG importing contracts among the NOCs, from projects such as Australia's North West Shelf and Queensland Curtis LNG, suppliers in Indonesia, Malaysia and Qatar, and international portfolio players who also supply US LNG.

Over October-November, more than half of the roughly 20 US LNG cargoes delivered to China were imported by CNOOC, and the two LNG cargoes currently en route from Sabine Pass to China are also for CNOOC, vessel tracking data showed.

Market participants have not reported any LNG trade disruptions due to the blacklisting so far.

"I don't see this having a massive impact on the market as there already isn't a significant amount of US LNG volumes going to China, although it does have potential to create some inefficiencies as it could limit CNOOC's ability to procure US cargoes on the spot market, assuming these sanctions stretch out to the LNG market," said Jeff Moore, Manager, Asian LNG Analytics at S&P Global Platts.

An executive with CNOOC Gas and Power Group, a CNOOC subsidiary focused on natural gas and power, also echoed the view that substantial impact on LNG trade will be limited unless there are further associated sanctions.

"US investment in these companies will be affected. Banks may be more conservative in their due diligence but short and long term contracts will not be affected," a Chinese LNG end-user based in Beijing said, while another executive said that the internal merger being discussed of CNOOC Gas and Power with the parent company might be a variable to look out for.

UPSTREAM FINANCING GETS TOUGHER

Lower valuations, withdrawals by wealth managers and funds and tougher access to capital due to the blacklisting could impact CNOOC's wider operations in the longer term, especially if it seeks to raise more capital for its upstream projects.

Goldman Sachs on Nov. 22 initiated coverage of China's NOCs with a buy rating on CNOOC, citing its "highly competitive new projects portfolio" that offered "uniquely low-cost growth as oil prices rise and non-OPEC production growth stalls."

HK-listed CNOOC Ltd's overseas production accounted for 33% of its total output over January-September, company results showed, significantly higher than the 14% reported by its upstream peer PetroChina for the same period.

CNOOC Ltd has partnerships with several big US oil and gas companies on upstream projects, mainly in China and the Americas, such as ConocoPhillips in the Bohai Basin and Chevron in the South China Sea, Eagle Ford and Niobrara shale formations, the US Gulf and Guyana.

Large share of CNOOC Ltd's oil, gas output is from overseas:

(Unit: million boe)

Source: Company filings